Biden’s Student Debt Relief Program Is Excellent, but Student Loans Suck to Begin With

If you make $125,000 or less and you have outstanding student loans, President Joe Biden has good news for you. He just canceled up to $10,000 of your debt. If you received Pell grants to attend college, make that up to $20,000 of your debt. If you’re married, the ceiling for income eligibility rises to $250,000. Biden also canceled all student debt in excess of 5 percent of any given debtor’s income, and he extended through the end of this calendar year a suspension of student loan payments that President Donald Trump began in March 2020, at the start of the Covid pandemic. If you’ve worked 10 years or more in public service (“federal, state, local, tribal government or a non-profit organization”), which puts you in a group that I’ve labeled the Asknots, you may be eligible to have all your student loans canceled. Also, if you earn an hourly wage of $15 or less, you won’t have to make your monthly payments until the boss gives you a raise.

This is good politics. Younger voters have been disaffected by the compromises Biden has had to make, and their turnout in the midterms could be weak. Canceling $300 billion in student loans should help persuade some chunk of them to vote (especially when combined with the growing reality that Republicans are bent on eliminating abortions under every conceivable circumstance).

Student debt relief is also good policy. Larry Summers complained in advance of the announcement that student debt relief would be inflationary, but that’s a red herring. Even if you believe, as Summers’s Harvard colleague Jason Furman does, that debt relief will wipe out all the inflationary gains from the Inflation Reduction Act, those gains were never much to write home about. The IRA’s real benefit will be in curbing climate change and rendering tax policy a bit more progressive. The Penn Wharton Budget Model estimated the IRA’s inflation reductions won’t even kick in until 2025, by which time, if inflation is still raging, the Democrats will have much bigger problems on their hands. Kent Smetters, who runs the Penn Wharton Budget Model, told The New York Times on Wednesday that Biden’s student debt relief would add perhaps one-tenth of 1 percent to the inflation rate. 

Republicans will try to wage class war over Biden’s announcement as part of their effort to separate Democrats from the working class, defined demographically as people who hold no college diploma. But a lot of working-class people carry a lot of student debt. More than one-third of college enrollees have not received their diplomas after six years, and few in this group ever will. Working-class college dropouts are left in the worst possible circumstance, with a heavy load of student debt and no college degree to help them work it off. Unsurprisingly, their default rate is triple what it is for people with college degrees. Default is no escape because the government can garnish the defaultee’s wages. Biden’s plan will help them.

The Department of Education estimates that 90 percent of the benefit of Biden’s student debt relief plan will go to people earning less than $75,000 a year. That makes it a model for the “middle-out” economics that Biden espouses as an alternative to the Republicans’ trickle-down strategy of shoveling tax cuts to “job creators” who typically use the money not to expand payroll or increase wages but to bankroll stock buybacks that enrich, well, themselves.

Will Biden’s policy create “moral hazard”? That is, will it encourage more people to take out student loans, with the expectation that they’ll never have to repay them? The Republican National Committee is making that argument. This is the same Republican Party that has fought tooth and nail against every Education Department attempt to limit the availability of student loans to people attending predatory for-profit colleges that run up sky-high default rates on student loans. But let’s grant these hypocrites that Biden’s plan might indeed increase moral hazard. I’m not persuaded that would be such a terrible outcome. That’s because a true middle-out economy wouldn’t make attending college conditional on loading young people up with debt at the start of their productive lives. It would work to make college more affordable, with the ultimate goal to provide a college education free of charge, or very close to it.

In the 2020 presidential campaign, Biden pledged to make public colleges and universities tuition-free for any family with income below $125,000. He also pledged to make attendance at community colleges free for everyone. He made good on the latter promise, or attempted to, but he ended up dropping it last fall from the Build Back Better bill to lower the bill’s cost (only to see it die anyway). Four-year colleges, shockingly, lobbied against the plan. “They want paying customers,” Max Lubin, chief executive officer of RISE, which organizes student-led campaigns to reduce tuition, told me at the time. If community college were free, some significant subset of attendees at four-year colleges would go to community college instead. That suggests efforts to make community college free may, out of political necessity, have to proceed in tandem with efforts to make four-year colleges free too. Bernie Sanders got this one right.

Democrats should not feel especially invested in the student loan program. The idea was dreamed up by conservative guru Milton Friedman in 1955 as an alternative to government subsidies. Friedman’s scheme was more left-wing than what we have today; he proposed that instead of having each student pay off a specific loan, the student would tithe a portion of all future earnings to the federal government. This has been tried in a few places, including Yale in the 1970s. The Yale option collapsed in the late 1970s when regular student loans were made available to everyone at subsidized rates and regular interest rates were sky-high, making the tithe alternative extremely unappealing to anyone possessing much economic literacy. In 1999, The Wall Street Journal checked in on those who’d opted for the tithe before that happened and found them, unsurprisingly, to be the biggest bunch of crybaby bond traders you ever saw.

Friedman didn’t anticipate how impervious increases in college tuition and fees would be to market forces. These costs have more than tripled, after inflation, since I wrote a 1982 piece denouncing college costs as “highbrow robbery.”  As a consequence, the average student debt load on graduation is more than $30,000, and the average student debt-to-income ratio is 55 percent. This is what economists call unsustainable and what human beings call barbaric. Biden’s student debt relief plan is a superb Band-Aid, but it’s a Band-Aid. We shouldn’t kid ourselves that the student loan solution to funding higher education will last much longer. It’s going to collapse, and before it does we should start moving toward a national policy that provides a college education, debt-free, to anyone who wants it.